Yes. This is a very common mistake that many ELSS investors make. They invest in a different new ELSS scheme every year and as a result, end up with several ELSS schemes after a few years.
One thing to understand here is that there is no compulsion to invest in different ELSS fund in different years. You can invest in the same ELSS scheme every year. That is assuming that the fund is performing well with respect to its benchmark and category.
Under Section 80C of the Income Tax Act, the ELSS category of mutual funds allow a tax deduction for an investment of up to Rs 1.5 lakh every year. There is nothing wrong with investing in ELSS funds every year to get tax benefits in addition to the potential for wealth creation. But it’s not necessary to invest in a new ELSS scheme every year. One can invest in the same ELSS scheme for several years if it continues to perform well.
Note – There is nothing special about ELSS funds as these are just equity funds with a 3-year lock-in thrown in. even the long term capital gains from ELSS funds above Rs 1 lakh per year are taxable at the rate of 10% just like it is for regular taxation of equity investment gains.
One reason that some investors end up investing in a different ELSS every year is that they tend to do some last-minute tax-saving and hence, end up investing lump sum amounts close to the end of the financial year. Another reason is that many times, investors just look at the ELSS fund that has given the highest return in the last 1 year and then invest in it. Since every year a new ELSS fund will be the best performer, the investors end up having multiple (too many) ELSS funds in their portfolios.
Now investing in ELSS funds SIP or Lumpsum is a question that needs to be answered by individual investors themselves. But for most investors who neither have the time or skill to time the markets year after year, are better off investing via SIP in ELSS funds. And this is not just for the ELSS funds. SIP is the best option even if investing in non-tax-saving regular equity funds. So let’ say if you want to exhaust your Section 80C limit of Rs 1.5 lakh and have already contributed Rs 50,000 to your EPF corpus, Rs 20,000 to your PPF account and have paid the term insurance premium of Rs 20,000, then you have another Rs 60,000 more to reach the Section 80C’s limit.
So if you plan to invest Rs 60,000 in ELSS funds in the financial year, then you can start a SIP of Rs 5000 every month for that. Or if you need to invest about Rs 1.2 lakh in ELSS funds, then you can do a SIP of Rs 10,000 per month.
And if you think about it, it’s not about diversification that many investors in multiple ELSS funds try to offer as the reason. In just a few years, they end up accumulating too many stocks because of multiple ELSS funds that aren’t just hard to monitor but ends up defeating the purpose of having a focused and optimally diversified mutual fund portfolio. In general, having a maximum of just 1-2 ELSS schemes in the portfolio is more than sufficient as investors would also have other equity funds in their portfolios.
Investing in ELSS funds is a good option for those who need to save tax and just getting started with equities, i.e. like young investors who are just starting their careers. Also, do read how to save Rs 1 crore using ELSS funds. And before you decide to invest more than Rs 1.5 lakh in ELSS funds every year, please do read this – Should I invest more than Rs 1.5 lakh in ELSS funds?
So all said and done, first assess your existing investment eligible for 80C benefits and figure out how much you need to invest in tax-saving ELSS funds. Then pick just one fund and keep investing in that ELSS scheme for a year or two. Next year, don’t be in a hurry to introduce another ELSS fund in your portfolio. First review the performance of the ELSS fund you have already invested in and if its performance after 1-2 years isn’t satisfactory, only then move to another ELSS fund. That’s how you should go about picking ELSS funds. But don’t just choose different ELSS fund in different years just for the sake of having more diversification or novelty. It will not work in your favour.
Additional reading: How many ELSS funds to invest in?
And when picking an ELSS fund to invest in, remember to go for consistent performers and not just recent table-toppers. Also, different ELSS fund manager have different biases for the portfolio. Some are large-cap oriented ELSS funds while others are mid-and-small cap based ELSS funds. So pick an ELSS fund that compliments the other regular funds in your portfolio without creating too much of a portfolio overlap.
Hope you found this article on why not to invest in a new different ELSS fund every year useful. If you know someone who is making this mistake, make sure to help them see the point discussed in this article about why they shouldn’t invest in more than 1-2 ELSS funds at a time.